1. Part IV: Supply & DemandSupply & Demand Shifts in Supply & DemandShifts in Supply & Demand Linked MarketsLinked Markets Complementary GoodsComplementary Goods Substitute GoodsSubstitute Goods Change in Quantity DemandedChange in Quantity Demanded Change in Quantity SuppliedChange in Quantity Supplied ECONOMICS What does it mean to me? READ Krugman Section 2, Module 5, 6, 7, 8, 9 Mankiw Ch 4, 5, 6 DO Morton Unit 2

2. LAW of SUPPLY LAW of DEMAND

3. LAW of DEMAND The LAW of DEMAND states that consumers are willing and able to consume less of a good as its price rises. (Food, sleep, date, study, etc.) QUANTITY P PPRIRICECEPPRIRICECE D (demand) $80 $70 $60 $50 $40 $30 $20 $10 0 100 200 300 400 500 600 …..or consume more of a good as its price decreases. Module 5

4. (Food, sleep, date, study, etc.) QUANTITY P PPRIRICECEPPRIRICECE D (demand) $80 $70 $60 $50 $40 $30 $20 $10 0 100 200 300 400 500 600 Math: Y = -mX + b Economics: P = -mQ + b The Ps and Qs have an inverse relationship. Module 5

5. Demand Schedule and Demand Curve PriceQuantity $ 8 3 $ 7 5 $ 6 7 $ 5 10 $ 4 12 $ 3 16 $ 2 22 Price Quantity Krugman, Economics for AP Module 5

6. Understanding Shifts of the Demand Curve Increase = right, Decrease = left M.E.R.I.T. shifts demand market size (number of consumers) expectations related prices (complements, substitutes) income (normal, inferior) tastes Krugman, Economics for AP Module 5

7. Table A-1 Novels Purchased by Emma Copyright©2003 Southwestern/Thomson Learning *Mankiw

8. Figure A-3 Demand Curve *Mankiw

9. Figure A-4 Shifting Demand Curves *Mankiw

10. Figure A-5 Calculating the Slope of a Line *Mankiw

11. LAW of SUPPLY The LAW of SUPPLY states that producers are willing and able to produce more of a good as its price rises. (Food, sleep, date, study, etc.) QUANTITY P PPRIRICECEPPRIRICECE S (supply) $80 $70 $60 $50 $40 $30 $20 $10 0 100 200 300 400 500 600 ….or produce less of a good as its price decreases. Module 6

12. (Food, sleep, date, study, etc.) QUANTITY P PPRIRICECEPPRIRICECE S (supply) $80 $70 $60 $50 $40 $30 $20 $10 0 100 200 300 400 500 600 The Ps and Qs have an direct relationship. Math: Y = mX + b Economics: P = mQ + b Module 6

13. Supply Schedule and Supply Curve PriceQuantity $ 822 $ 714 $ 68 $ 56 $ 45 $ 34 $ 23 Quantity Price Module 6

14. Understanding Shifts of the Supply Curve Increase = right, decrease = left T.R.I.C.E. shifts supply Technology Related prices (complements in production, substitutes in production) Input prices Competition (number of producers) Expectations Module 6

15. Putting these two curves together gives us the point of Putting these two curves together gives us the point of EQUILIBRIUM…equilibrium gives us the optimum point of production at the price people are willing to pay. (Food, sleep, date, study, etc.) QUANTITY P PPRIRICECEPPRIRICECE S (supply) D (demand) E (equilibrium) $80 $70 $60 $50 $40 $30 $20 $10 0 100 200 300 400 500 600 Module 6

16. Equilibrium Equilibrium price Equilibrium quantity Market-clearing price Supply, Demand, and Equilibrium Module 6

17. Finding the Equilibrium Price and Quantity equilibrium E price equilibrium quantity Module 6

18. Why Does the Market Price Fall If It Is Above the Equilibrium Price? Surplus Producer's Incentive Module 6

19. Why Does the Market Price Rise If It is Below the Equilibrium Price? Shortage Consumer's Incentive The tendency towards equilibrium Module 6

20. In a market economy, the price of a good signals to consumers the cost of producing a good. MARKET PRICE also signals to producers the value that consumers place on a good. Market price coordinates the actions of consumers (demand) and producers (supply).

21. What happens when changes occur in the economy? How do these changes affect supply and demand?

22. The Chicago Cubs have a winning season. What happens to the price of World Series tickets? Does this affect the supply or demand curve?

23. Chart I: Demand increase (P ; Q ) QUANTITY P PPRIRICECEPPRIRICECE S D0D0D0D0 E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 The Chicago Cubs have a winning season. What happens to the price of World Series tickets? D1D1D1D1 Price goes up Quantity goes up

24. What Happens When the Demand Curve Shifts? When demand increases, the equilibrium price and quantity both increase Module 6

25. Gas prices increase dramatically. What happens to the market for big automobiles? Does this affect the supply or demand curve?

26. Chart II: Demand decrease (P ; Q ) QUANTITY P PPRIRICECEPPRIRICECE S E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 Gas prices increase dramatically. What happens to the market for big automobiles? D0D0D0D0 D1D1D1D1 Price goes down Quantity goes down

27. What Happens When the Demand Curve Shifts? When demand decreases, the equilibrium price and quantity both decrease Module 6

28. Plentiful oil fields are discovered in Nevada. What happens to the market for oil? Does this affect the supply or demand curve?

29. Chart III: Supply Increase (P ; Q ) QUANTITY P PPRIRICECEPPRIRICECE S0S0S0S0 D E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 Plentiful oil fields are discovered in Nevada. What happens to the market for oil? S1S1S1S1 Price goes down Quantity goes up

30. What Happens When the Supply Curve Shifts? When supply increases, the equilibrium price decreases and the equilibrium quantity increases Module 6

31. A drought has depleted the corn crop. What happens to the market for corn? Does this affect the supply or demand curve?

32. Chart IV: Supply Decrease (P ; Q ) QUANTITY P PPRIRICECEPPRIRICECE S0S0S0S0 D E0E0 P0P0 Q0Q0 P1P1 Q1Q1 E1E1 A drought has depleted the corn crop. What happens to the market for corn? S1S1S1S1 Price goes up Quantity goes down

33. What Happens When the Supply Curve Shifts? When supply decreases, the equilibrium price increases and the equilibrium quantity decreases Module 6

34. http://www.yadayadayadaecon.com/clip/18/

35. Let’s look at a shift using numbers: The government adds a $1 tax to cigarettes. Does this affect supply or demand?

36. Chart IV: Supply Decrease (P ; Q ) QUANTITY P PPRIRICECEPPRIRICECE S0S0S0S0 D E0E0 $6 $5 $4 $3 $2 $1 0 1K 2K 3K 4K 5K E1E1 Congress adds $1 tax to cigarettes. S1S1S1S1 Price goes up Quantity goes down This area represents the $1 tax.

37. Demand and Supply: Single Markets where both curves shift.

38. Now let’s see what happens when an event occurs and impacts both the supply and the demand….

39. What is the short term impact of the government legalizing marijuana? Will this affect the supply curve or the demand curve? Or both?

40. Chart V: (D ; S ) QUANTITY P PPRIRICECEPPRIRICECE S D0D0D0D0 E0E0 P0P0 Q0Q0 What is the short term impact of the government legalizing marijuana? D1D1D1D1 S1S1S1S1 E1E1 Q1Q1 The demand curve moves right indicating an increase. The supply curve moves right indicating an increase.

41. Chart V: (D ; S ) QUANTITY PRICE S D0D0D0D0 E0E0 P0P0 Q0Q0 This chart shows and increase in both supply and demand. As a result: D1D1D1D1 S1S1S1S1 E1E1 Q1Q1 Price will be indeterminate. Quantity will increase

42. Simultaneous Shifts of Supply and Demand When demand and supply increase, the change in equilibrium price is ambiguous, but equilibrium quantity definitely increases Module 7

43. Frost hits coffee growing areas, while coffee is “cleared” as a cause of cancer. Will this affect the supply curve or the demand curve? Or both?

44. Chart VI: (D ; S ) QUANTITY P PPRIRICECEPPRIRICECE D0D0D0D0 E0E0 P0P0 Q0Q0 Frost hits coffee growing areas, while coffee is “cleared” as a cause of cancer. D1D1D1D1 The demand curve moves right indicating an increase. The supply curve moves left indicating an decrease. P1P1 S0S0S0S0 S1S1S1S1 E1E1

45. Chart VI: (D ; S ) QUANTITY P PPRIRICECEPPRIRICECE D0D0D0D0 E0E0 P0P0 Q0Q0 In this chart, demand will increase while supply decreases. This will result in: D1D1D1D1 P1P1 S0S0S0S0 S1S1S1S1 E1E1 Price will increase. Quantity will be indeterminate.

46. Simultaneous Shifts of Supply and Demand When demand increases and supply decreases the equilibrium price definitely increases, but quantity is ambiguous Module 7

47. A sturdy, shippable tomato that tastes like cardboard is introduced into the market. Will this affect the supply curve or the demand curve? Or both?

48. Chart VII: (D ; S ) QUANTITY P PPRIRICECEPPRIRICECE E0E0 P0P0 Q0Q0 P1P1 E1E1 A sturdy, shippable tomato that tastes like cardboard is introduced into the market. D0D0D0D0 D1D1D1D1 S0S0S0S0 S1S1S1S1 The demand curve moves left indicating an decrease. The supply curve moves right indicating an increase.

49. Chart VII: (D ; S ) QUANTITY E0E0 P0P0 Q0Q0 P1P1 E1E1 When demand is decreased and supply is increased, this results in: D0D0D0D0 D1D1D1D1 S0S0S0S0 S1S1S1S1 Price will decrease. Quantity will be indeterminate. PRICE

50. Simultaneous Shifts of Supply and Demand When demand decreases and supply increases the equilibrium price definitely decreases, but quantity is ambiguous Module 7

51. Newspapers report high levels of salmonella in chickens, many must be destroyed. Will this affect the supply curve or the demand curve? Or both?

52. Chart VIII: (D ; S ) QUANTITY P PPRIRICECEPPRIRICECE E0E0 P0P0 Q0Q0 Newspapers report high levels of salmonella in chickens, many must be destroyed. D0D0D0D0 D1D1D1D1 The demand curve moves left indicating an decrease. The supply curve moves left indicating an decrease. S0S0S0S0 Q1Q1 E1E1 S1S1S1S1

53. Chart VIII: (D ; S ) QUANTITY PRICE E0E0 P0P0 This chart shows what happens when demand and supply are both decreased. D0D0D0D0 D1D1D1D1 S0S0S0S0 Q1Q1 E1E1 S1S1S1S1 Q0Q0 Price will be indeterminate. Quantity will decrease

54. Simultaneous Shifts of Supply and Demand When demand and supply decrease, the change in equilibrium price is ambiguous, but equilibrium quantity definitely decreases Module 7

55. LINKED MARKETS

56. LINKED MARKETS pertain to those goods which affect other goods. For instance: Coffee => Peaches => Vegetarianism => Cream Blueberries Leather Coats

57. Coffee beans are hit by an unusual frost. What happens to the price and quantity of cream ? Which of the charts (I, II, III, or IV) will pertain to these markets?

58. Chart IV represents the depleted coffee crop. Price goes up Quantity goes down

59. The demand for cream decreases as graphed in Chart II. Price goes down Quantity goes down

60. So, a decrease in the supply of coffee causes the price of coffee to rise. People who do not want to pay the high price for coffee will have a reduced demand for cream to go into the coffee. complementary goods. Coffee and cream are considered complementary goods.

61. A complementary good is defined as a good who, when its price rises causes a decrease in the demand of another good (or visa versa). Complementary goods have an inverse relationship between price of one good and demand for another. P a D b

62. A virus attacks broccoli. What happens to the price and quantity of brussels sprouts? Which of the charts (I, II, III, or IV) will pertain to these markets?

63. Chart IV represents the depleted broccoli crop. Price goes up Quantity goes down

64. Chart I represents the increase in demand of brussels sprouts. Price goes up Quantity goes up

65. So, the virus creates a diminished supply of broccoli which drives up the price. Consumers who don’t wish to pay the higher price will look for a substitute good such as brussels sprouts.

66. A substitute good is defined as a good who, when its price rises causes a increase in the demand of another good (or visa versa). Substitute goods have a direct relationship between price of one good and demand for another. P a D b

67. A wrinkle-free, nice cloth is invented. What happens to the price and quantity of cotton? Which of the charts (I, II, III, or IV) will pertain to these markets?

68. The demand for the new cloth increases as graphed in Chart I. Price goes up Quantity goes up

69. The demand for cotton decreases as graphed in Chart II. Price goes down Quantity goes down

70. So…..people using, or demanding, less cotton will cause the price to go down and less of the fabric to be made. Are these goods substitute or complementary?

71. Vegetarianism expands greatly, what happens to the P & Q of leather coats? Which of the charts (I, II, III, or IV) will pertain to these markets?

72. Chart I shows what happens to the P & Q of vegetables. Price goes up Quantity goes up

73. The demand for beef decreases as graphed in Chart II. Price goes down Quantity goes down

74. Chart IV shows what happens to the P & Q of leather coats. Price goes up Quantity goes down

75. So…..the increase in the purchase of vegetables will create a lack of demand for beef. This will cause fewer cows to be slaughtered, creating less leather to be available, or a decrease in supply, which will cause the price to go up on leather coats.

76. http://www.yadayadayadaecon.com/clip/86/ http://www.yadayadayadaecon.com/clip/60/

77. Economics is mostly about changes--not levels.

78. Several years ago, Baby M was born to a surrogate mother who had been paid $10,000 to give birth to the baby. The birth mother changed her mind and sued in court to have the child returned to her. The judge agreed. What impact did this have on the supply of surrogate mothers? What impact did this have on the demand for babies born to surrogate mothers?

79. Using supply and demand analysis, explain why the price of roses always seems to rise just before Valentine’s Day. Exercise One:

80. Using supply and demand analysis, determine how a freeze that kills half the rose crop would affect the price of roses.

81. Using supply and demand analysis, determine how a freeze that kills half the rose crop would affect the price of fine chocolates.

82. Exercise Two: Some time ago,the city of Ft.Lauderdale had an initiative on the general election ballot that asked voters to raise the minimum wage in that city to a level 40 percent above the national minimum wage. This year the initiative would make the minimum wage be $7.35 in Ft. Lauderdale and $5.25 elsewhere.

83. How would things in Ft. Lauderdale have changed if the initiative had passed?How would things in Ft. Lauderdale have changed if the initiative had passed? What would be the same?What would be the same? What would change?What would change?

84. Predict the effect of the legislation on the markets for labor in Ft. Lauderdale and in the suburbs outside the city.

85. Would you rather work in Ft. Lauderdale or outside the cityWould you rather work in Ft. Lauderdale or outside the city Would you be more likely to find a job in Ft. Lauderdale or outside the city?Would you be more likely to find a job in Ft. Lauderdale or outside the city?

86. There is a small business person who is planning to re-locate to the Ft. Lauderdale area. *Would you advise the business person to set up business in Ft. Lauderdale or in a suburb of Ft. Lauderdale? What is your reasoning?

87. Exercise Three: Suppose you run a lawn mower business. You charge $15 per standard size lawn and can mow five lawns in an eight hour day. You currently have more people asking you to mow their lawns than you can satisfy and estimate that you could sign up as many as 25 additional customers. You have two strategies that will permit you to expand your business.

88. Strategy Two….is to rent a riding lawn mower that will permit you to mow seven lawns per day. Rent for the riding mower is $100 per week. Gas and oil for the mower cost $25 per week. Strategy One…….is to hire your friend Jim to work for you. Jim is a good worker who will work for $8 an hour.

89. OPTION 0: Actually, there are 3 options--the first being “status quo.” ($15 per lawn) X (25 lawns per week) = $375 per week

90. OPTION 1: Hire Jim to work by the hour. It takes him 8 / 5 = 1.6 hours to mow a lawn Marginal Revenue per lawn = $15 Marginal loss per lawn = ($8 per hour) X (1.6 hours to mow) = $12.80 $15 - 12.80 = $2.20 extra profit per lawn

91. If Jim mows 25 lawns per week: 25 X $2.20 = $55 profit per week YOUR NET REVENUE IS: $375 + 55 = $430

92. OPTION 2: Rent Lawn Mower MARGINAL REVENUE (7 lawns per day) X (5 days) = 35 lawns per week 35 lawns X $15 per lawn = $525 MARGINAL LOSS = $125 YOUR NET REVENUE IS: $525 -125 = $400

93. Should you expand your business? Why or why not? Which strategy, if any, should you use? Why?

94. If the riding lawn mower permitted you to mow 8 lawns per day, would your strategy change? Why or why not?If the riding lawn mower permitted you to mow 8 lawns per day, would your strategy change? Why or why not?

95. OPTION 4: Rent Lawn Mower (8 lawns per day) MARGINAL REVENUE (8 lawns per day) X (5 days) = 40 lawns per week 40 lawns X $15 per lawn = $600 MARGINAL LOSS = $125 YOUR NET REVENUE IS: $600 -125 = $475

96. THE END Compiled by Virginia Meachum, Economics Teacher, Coral Springs High School, Broward County, FL